Foreign exchange markets the world over have been lifted by historic levels of volatility and by the inflow of investors seeking liquid markets and “plain vanilla” assets. But new research from Greenwich Associates shows that the growth of e-forex last year far outpaced the expansion of foreign exchange trading as a whole. In fact, the 37% growth rate in electronic trading was almost triple that of the 13% year-over-year increase in total FX trading volume. As a result, the proportion of global foreign exchange trading volume executed through electronic systems jumped to 53% in 2008 from 44% in 2007.
“The severity of the global banking crisis makes the continued strength of e-forex and foreign exchange markets all the more impressive,” says Greenwich Associates consultant Peter D’Amario. “Despite a crisis of confidence that caused counterparties to stop trading with certain banks altogether and to reduce the trading lines they were willing to extend, the market managed to sustain its momentum and grow to new record levels.”
(Note: Greenwich Associates tracks foreign exchange volume among a universe of 1,440 end user customers; volume figures reported in this report exclude inter-bank transactions and volume generated from other sources. Interviews were conducted in September, October and November 2008, and the research covers the prior 12-month period.)
Europe Leads eFX Surge
E-trading growth was strongest in Europe, where electronic trading volume jumped some 78% in the United Kingdom and 37% in continental Europe from 2007 to 2008. The share of total FX volume routed through electronic trading systems climbed to 57% from 47% on the Continent and to 58% from 41% in the United Kingdom. Growth in U.S. e-trading volumes was only slightly more modest at almost 20%. Overall, the biggest increase in electronic trading volumes last year came from retail aggregators, whose total e-forex volume grew 43% year-over-year. E- trading volume increased by 26% among corporate users and by 40% among financials.
A modest inflow of new e-forex customers helped expand 2008 trading volumes. Globally, the proportion of foreign exchange traders using electronic systems for at least a portion of their FX trading business increased modestly to 57% in 2008 from 55% in 2007. Driving the growth in the e-forex client base was an increase in the proportion of corporate FX traders using electronic systems, which climbed to 45% from 42%. Usage was highest among the world’s largest foreign exchange traders — institutions and companies generating at least $50 billion in annual FX volume — of which 82% trade FX electronically.
Seventy percent of U.S. FX traders used e-forex systems in 2008, up from 67% in 2007. Usage rates increased to 69% from 64% in continental Europe and to 68% from 64% in the United Kingdom. In Japan, electronic trading adoption rates continued to lag those seen in these western markets, despite the fact that the share of Japanese FX traders using e-trading systems increased to 40% in 2008 from 34% in 2007 (primarily due to the influence of retail aggregators in that market). Across the rest of Asia, e-forex use was flat at 46%. Canada remains the one true outlier in this business. Only about a quarter of Canadian FX traders trade FX electronically — less than the proportion using eFX in 2007.
Third-Party Platforms Positioned for Growth
The research results do suggest that usage might be reaching a natural plateau among existing e-forex users. Around the world, the typical eFX user executes just short of two-thirds of its total foreign exchange trading volume through electronic channels — a share that was unchanged from 2007 to 2008. In fact, the proportion of total FX trading volume routed to electronic systems actually declined in some regions. In the United States the share of total FX volume executed electronically by users of e-forex systems dropped to 61% in 2008 from 68% in 2007; in the United Kingdom it fell to 64% from 67% and in non-Japan Asia it declined to 63% from 67%. The only regions to see increases were continental Europe, where the average rose to 67% from 63%, and Japan, where it increased to 75% from 70% among a much smaller group of eFX users.
There is also evidence to suggest that the extreme levels of volatility seen in the market at various points in 2008 prompted some customers to shift business from single-bank trading systems to multi-dealer platforms “When prices and spreads started moving too fast for e-trading pricing engines to keep up, certain banks became less willing to quote FX electronically,” says Greenwich Associates consultant Tim Sangston. “However, those disruptions seem to have been temporary.”
Not only have the disruptions from the first three quarters of 2008 subsided, conversations with FX dealers and Greenwich Associates Research Partners suggest that trading volumes for e-forex soared to record levels in November and December. “We expect that strength to continue through much of 2009,” says Greenwich Associates consultant Frank Feenstra. “Since credit risk concerns persist worldwide and because spreads remain wide, we believe third-party e-forex platforms are particularly well positioned for growth.”
Third-Party Platforms Positioned for Growth
The research results do suggest that usage might be reaching a natural plateau among existing e-forex users. Around the world, the typical eFX user executes just short of two-thirds of its total foreign exchange trading volume through electronic channels — a share that was unchanged from 2007 to 2008. In fact, the proportion of total FX trading volume routed to electronic systems actually declined in some regions. In the United States the share of total FX volume executed electronically by users of e-forex systems dropped to 61% in 2008 from 68% in 2007; in the United Kingdom it fell to 64% from 67% and in non-Japan Asia it declined to 63% from 67%. The only regions to see increases were continental Europe, where the average rose to 67% from 63%, and Japan, where it increased to 75% from 70% among a much smaller group of eFX users.
There is also evidence to suggest that the extreme levels of volatility seen in the market at various points in 2008 prompted some customers to shift business from single-bank trading systems to multi-dealer platforms “When prices and spreads started moving too fast for e-trading pricing engines to keep up, certain banks became less willing to quote FX electronically,” says Greenwich Associates consultant Tim Sangston. “However, those disruptions seem to have been temporary.”
Not only have the disruptions from the first three quarters of 2008 subsided, conversations with FX dealers and Greenwich Associates Research Partners suggest that trading volumes for e-forex soared to record levels in November and December. “We expect that strength to continue through much of 2009,” says Greenwich Associates consultant Frank Feenstra. “Since credit risk concerns persist worldwide and because spreads remain wide, we believe third-party e-forex platforms are particularly well positioned for growth.”
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